After nearly a decade of boisterous economic growth, investors have been taken aback by recent falls in share prices around the world. America's Nasdaq stock market has fallen by 70% since the beginning of 2000; some emerging markets have fared even worse. Financial pundits have fingered a number of plausible culprits, from the popping of the dotcom bubble to the fallout from September 11th. But when all else fails, critics turn their fire on a centuries-old scapegoat: short-sellers.

The small fraternity of speculators who profit from the market's misfortune are used to the criticism. They have been vilified ever since European bourses first took off in the 17th century. In the 1920s, Otto Kahn, an investment banker, claimed shorting was "inherently repellent to a right-thinking man".

When stock markets crash, public cries to outlaw short-selling are never far behind. When Britain's South Sea Bubble popped in 1720, short-selling was temporarily banned, as it was a century later in the United States during the War of 1812. After "Black Thursday" in 1929, which kicked off the Great Depression, US regulators implemented a series of securities reforms aimed at restricting short-sales. Now, shell-shocked financial regulators from Tokyo to Berlin are moving against short-sellers, enforcing tougher regulations or even contemplating outright bans. They pray that these measures will prop up share prices and, by extension, investor confidence.

Such knee-jerk reactions against short-selling could scarcely be more short-sighted. Rather than dragging markets down with their avarice, short-sellers play an unsung role in combating fraud and checking the damaging mindset that Alan Greenspan, the US Federal Reserve chairman, famously called "irrational exuberance". As the Financial Times put it last September: "Short-selling does not kill share prices; fundamentals kill share prices."

THE LONG AND SHORT OF IT

Though little understood, short-selling is actually a relatively simple transaction. It begins with a speculator who believes a share will plummet in value. He or she borrows some of those shares, typically from a brokerage house or an insurance company. The shorter then sells the borrowed shares, promising to replace the shares, plus interest, at a future date. If all goes well for the speculator, the share price falls, and he is able to scoop up the replacement shares at a lower price. He then pockets the difference between the loan and repurchase prices.

But if the investor's bet does not pay off, the losses can be steep. Since the transaction involves borrowed money, the shorter must maintain plenty of collateral -- usually around half the value of the share -- or face a margin call. And since there is no cap on how high a share can climb, an unwise shorter can easily lose a packet.

Because it is so risky, short-selling is rare, especially among individual investors. Less than 2% of New York Stock Exchange trades are short sales, and the figure is even lower on the Nasdaq stock market. Most of these trades are executed by hedge funds or a handful of high-risk unit trusts (mutual funds) that specialise in short positions.

The global economic chill has revived anti-shorting sentiment in several countries. Earlier this year, Japan's Financial Services Agency moved to strengthen short-selling restrictions by introducing an "uptick rule". This decrees that shares can only be sold short above the last price traded. The agency has also pressured insurance companies to stop lending shares to short-sellers, a tactic also employed by Britain's Financial Services Authority last autumn after September 11th. In February, Hans Eichel, Germany's finance minister, proposed a temporary ban on short-selling as part of a draft law on financial promotion.

These reforms are invariably popular with the general public. To the small investor, whose life savings may be tied up in index funds or blue-chip shares, anyone who bets against the market is instantly regarded with suspicion. "I was giving a lecture in Boston when I was a stockbroker, and the subject was short-selling," recalls Sarkis J Khoury, a professor of international finance at the University of California at Riverside. "This lady stood up with an umbrella in her hand and said,